The Dual Nature of Perpetual Futures: Insights from Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that arises. These derivative contracts enable traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them a unique and appealing option for traders. For altcoin traders, perps are frequently the only viable derivatives market available, as dated futures for these assets are often illiquid. The spot market is also less relevant for traders who do not plan to hold onto their assets long-term. CoinDesk spoke with traders who have thrived in the perpetual futures market to understand the advantages and challenges of perps. They highlighted the deep liquidity, low trading fees, and efficient margin usage as key benefits. However, traders also expressed concerns about the funding rates associated with perps, which can add significant costs to trades. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether. Kenneth Ong, an independent trader, emphasized the advantages of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders stressed that margin efficiency is a major draw to perps, as they allow for greater leverage and more efficient risk management. The always-on nature of perps has also shifted price discovery to occur around the clock, rather than only during traditional market hours. Ong shared an example of how perps reacted to the Iran conflict, with tokenized oil trading surging on Hyperliquid while traditional markets were closed. Krenn sees perps as a powerful instrument that will continue to spread into new asset classes, allowing for more efficient trading and price discovery. However, traders also warned about the risks associated with perps, particularly the funding rates, which can be unpredictable and costly. A dated futures contract provides a clear interest rate, whereas a perpetual futures contract has a funding rate that changes over time and is typically charged every eight hours. This exposes traders to a floating rate, making it difficult to quantify and hedge. Krenn and Ong emphasized that the funding rate is a significant concern, as it can potentially turn a profitable trade into a loss. The traders also discussed the myth of the 'safe trade,' highlighting the risks of liquidations and the importance of understanding the underlying mechanics of perps. Krenn argued that the problem is not with perps themselves, but rather with the crypto exchange margin model. He noted that dated futures on the same venues face similar issues, and that the key distinction is between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn also offered an insight into the asymmetry of perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, arbitrage is more difficult, and the gap between perp and spot prices can persist. This creates an asymmetry that is not often accounted for in risk models. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency. However, they also introduce unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'